Release of PBO’s Quarterly Economic and Fiscal Commentary Q2 2019

The Irish economy continues to experience strong and balanced growth. 2018 was a good year for the Irish economy and this momentum continued into 2019 as employment, wages and retail sales experienced strong growth in the first quarter. Government finances also improved as tax revenue was 6.9% higher in the first half of 2019, compared to the same period in 2018.

While employment continues to grow at a steady pace, there are signs that the labour market is tightening. The unemployment rate is now at its lowest level in thirteen years and employee turnover is higher than it was in 2007.  Ireland also experienced the strongest wage growth in the EU-15 last year. While the total number of people employed continues to grow, there were some signs that skills shortages may be slowing employment growth in certain segments of the market. For example, there was a slight reduction in the number of ‘high skill’ jobs created last year. A total of 30,000 ‘high skill’ jobs were created on average each year from 2015 to 2017. This fell to 13,000 in 2018 as only one in every five new jobs were in this ‘high skill’ category.

Director of the PBO, Annette Connolly, said that “While the economy continues to perform strongly, it still faces several risks. From an international perspective, global growth is expected to slow this year. The major forecasting bodies predict a slowdown in global growth from 3.4% in 2018, to 3.0% in 2019. Changes in international tax rules, particularly the actions underpinning BEPS 2.0 pose a real threat to the public finances over the medium term. This is particularly relevant for Ireland given that 77% of corporation tax receipts come from foreign-owned multinationals, and almost half of all corporation tax receipts come from the top ten tax payers. Both these factors pose significant risks, however the probability of a ‘no-deal’ Brexit has increased further in recent weeks and is now the most pressing risk facing the economy.”

On the domestic side, the economy is now at a late stage of the business cycle. This means that overheating pressures are emerging and this will cause growth to moderate as supply fails to keep pace with demand. Given the international risks facing the economy, which Ireland has no control over, the public finances should be in a stronger condition. Persistent expenditure overruns, particularly in the Health vote, have contributed to a deterioration in the general government balance, and the use of volatile and unexpected corporation tax receipts to fund recurring expenditure remain a concern. Exchequer Health spending in the first half of this year has been in line with expectations. However, in the past, the majority of overruns fell in the second half of the year. For example, in Q2 2018 Health was €168 million above profile in current expenditure, however, by end-2018 this overrun reached €625 million. In addition, HSE data and commentary has indicated that its expenditure has exceeded its allocations in the first half of the year. Therefore, careful monitoring will be required as the year continues to determine the likelihood that another Supplementary Estimate will be sought from Dáil Éireann.

The Quarterly Economic and Fiscal Commentary Q2 2019 is available here